Ethereum Needs Competition

No matter how good the intentions or democratic the governance, a lack of competition could shape culture and behavior.

AccessTimeIconNov 23, 2022 at 6:16 p.m. UTC
Updated Nov 23, 2022 at 7:39 p.m. UTC
AccessTimeIconNov 23, 2022 at 6:16 p.m. UTCUpdated Nov 23, 2022 at 7:39 p.m. UTCLayer 2
AccessTimeIconNov 23, 2022 at 6:16 p.m. UTCUpdated Nov 23, 2022 at 7:39 p.m. UTCLayer 2

Hear me out.

As I never tire of pointing out in meetings, there’s nothing you can do with a blockchain that you can’t also do faster and cheaper with a traditional centralized computing infrastructure. While blockchains have generated some very cool new approaches to products and services, including tokenization and smart contracts, they can all be replicated in a centralized system. The essential, irreducible value proposition of a blockchain is true decentralization. Everything else is optional.

For enterprise users, I believe that value proposition is tied to a well-founded fear of the power of centralized market operators and the path they generally take from useful utility to predatory monopolist. This is why private blockchains remain such a silly idea. Decentralization theater doesn’t change the fact that the system operator is just a potential future predatory monopolist.

Paul Brody is EY's global blockchain leader and a CoinDesk columnist.

From ride-sharing to consumer products, the story of the digital economy in the last decade has been the rise of these so-called nearly unshakeable digital monopolists. Along the way, some of these firms may have been raising the share they take of the transactions that are executed on their networks. This generally happens when the value proposition of a marketplace shifts from “it’s a better system” to “it’s just a bigger system” and eventually to “it’s the only system with efficient scale to reach your customers or suppliers.”

Though the world of Web2 is still (historically speaking) new, this isn’t a new problem and we’ve solved it before, not with decentralization but with regulation. In 1895, there were an estimated 6,000 local phone companies in the United States. Each company could set its own rates and had to reach agreements with each other for interconnection. Just like today’s so-called digital monopolies, the big got bigger. Eventually, there was just one dominant player left, AT&T, the eventual successor to the American Telephone Company founded by Alexander Graham Bell and his father-in-law in 1885.

To “regulate” AT&T and create a level playing field for smaller, competitive companies in the telecom space, the Communications Act of 1934 decreed that telephone service was a public service and participants in the business were common carriers. To be designated a common carrier meant that a company must offer its products and services to all members of the public on equal terms, including interconnection. In that world, the carrier with the biggest network could not shut out smaller players or charge them steep fees to connect calls from one network to another.

Imagine if common carrier rules were applied to private blockchains, complete with mandated interconnection rules and fees. In this world, any user of any private blockchain could interconnect and transact with any other user or any other private blockchain. No matter how big or small the chain, the biggest operators would not be able to attract market share simply by being bigger. They’d have to be better. Perhaps that means faster, more secure, or more reliable.

There are some big attractions for this kind of approach. The most important is that, in many ways, it can produce a much more competitive and dynamic marketplace. Centralized private blockchain operators would compete with each other to be the best. The downside is that the nature of that competition is limited. For a token or smart contract to be interconnected from one private chain to another, they have to be fundamentally the same or so similar as to be indistinguishable for most purposes. Just as ISPs are largely reduced to competing on speed and price, the nature of common carrier competition tends to be quite limited.

In 1984, the Bell system was broken up into a series of regulated regional operators, which were separated from the long-distance phone call business. Subscribers paid monthly fees for access and local calls, and long-distance calls were charged per minute. Consumers and businesses could choose any long-distance provider they wanted, all of which had equal access to the local phone network thanks to common carrier rules. The result was a competitive transformation which drove down the cost of long-distance calls by 40% over a decade. Eventually, the plunging cost of networking and computing drove those fees down to near zero, where they have remained ever since.

Why does any of this matter? Because warm, friendly, community-centric Ethereum may not be far from becoming a global digital commerce monopolist. Ethereum is already much more valuable than any other blockchain ecosystem and has the most developers and users. That makes it harder and harder for viable competitors to emerge, no matter how good they might be. Over time, the power of that network is likely to only grow stronger.

Ethereum is unlikely to become a predatory monopolist, jacking up fees and squeezing users. Nor do I foresee the Ethereum Foundation commissioning a grand headquarters tower in New York City any time soon. However, no matter how good the intentions, no matter how democratic the governance, a lack of competition could shape culture and behavior. Complacency and self-satisfaction could eventually be just as damaging to the pace of innovation.

Having competition breathing down your neck is good for all organizations, even nonprofits. Common carrier regulations could transform the world of private blockchains from irrelevant to competitive overnight. As good as Ethereum is, serious on-going competition would make it better and keep it that way.

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Paul Brody

Paul Brody is Global Blockchain Leader for EY (Ernst & Young). Under his leadership, EY is established a global presence in the blockchain space with a particular focus on public blockchains, assurance, and business application development in the Ethereum ecosystem.

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